Is Fujian Cosunter Pharmaceutical (SZSE:300436) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Fujian Cosunter Pharmaceutical Co., Ltd. (SZSE:300436) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fujian Cosunter Pharmaceutical

What Is Fujian Cosunter Pharmaceutical's Net Debt?

The chart below, which you can click on for greater detail, shows that Fujian Cosunter Pharmaceutical had CN¥444.2m in debt in September 2024; about the same as the year before. However, it does have CN¥127.3m in cash offsetting this, leading to net debt of about CN¥316.9m.

A Look At Fujian Cosunter Pharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that Fujian Cosunter Pharmaceutical had liabilities of CN¥545.8m due within 12 months and liabilities of CN¥472.9m due beyond that. On the other hand, it had cash of CN¥127.3m and CN¥64.7m worth of receivables due within a year. So its liabilities total CN¥826.6m more than the combination of its cash and short-term receivables.

Of course, Fujian Cosunter Pharmaceutical has a market capitalization of CN¥5.60b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fujian Cosunter Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Fujian Cosunter Pharmaceutical wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to CN¥469m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Fujian Cosunter Pharmaceutical managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥123m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥70m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Fujian Cosunter Pharmaceutical (including 2 which are a bit unpleasant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.